It was over

So said the NBER today. The recession was over in June of 2009.

That was when my family was getting ready to move across the country, from the West Coast to the East. It didn't feel that way, although the market was on a rebound and GDP started to go positive.

For us, it took more than a year since then to finally have a sense that our lives are getting back on track, after we bought our house in August.

We've just moved in. Our new neighbors are getting to know us and vice versa. We're receiving welcoming notes and cookies. Our kids are already making friends with the kids in the neighborhood. There are doctors, engineers, businessmen, pilots, professors... mostly professionals. Interestingly, almost half of my neighbors are fairly new to the neighborhood. There have been a lot of turnovers. The new families will be fostering a sense of new community, I think.

But the lingering affects of the recession are visible. Home prices are still dropping... and just as we moved in to our new house, a house across the street was put on the market for sale. Its owner just had a surprise job change. Another home owner told me that he is closing down his business.

I'm still glad our moves are finally over.   

Education and Unemployment Rate

Laura Tyson, my former dean at Haas School of Business, wrote an op-ed piece on NYT in which she argues for a second stimulus spending. Her arguments are inline with some of the discussions I've read from Paul Krugman and Joseph Stiglitz. These practicing Keynesian economists are all for government intervention. So that's not surprising.

What's kind of surprising is she would say things like worrying about deficits and the size of the government is focusing on the wrong things. Wrong things? She probably meant wrong focus.

The statistics she cited about education and unemployment rate is very interesting:

Consider how the unemployment rate varies by education level: it’s more than 14 percent for those without a high school degree, under 10 percent for those with one, only about 5 percent for those with a college degree and even lower for those with advanced degrees.

Education in the U.S. does help cushion workers against the general and severe downturn. This is consistent with the outsourcing movements over the last decades: low-paying jobs that require little or no education moved mostly to countries like India and China. What U.S. should do is indeed to make college education more prevailent among its population of over 300 millions. But that cannot be accomplished in a few months or a few years.

In contrast, college degrees in China may not mean high level of employment. I have not seen any good statistic, but casual observation suggests that family background and connection play a much more important role in landing a stable job, preferrably in government or state-own companies,  in China.

Brain is still valued a lot more in the U.S.

   

Buying a house

We've been renting a house since we moved from SoCal to Penn last year. Renting was a good choice, as we needed to get to know the new area, and make sure the schools and neighborhood would work for us.

We rented our old house to a family moved down from NorCal to SoCal. They rented out their house too.

So for the first time in my life, I've become both a landlord and a tenant at the same time. It was quite an experience.

We tried to be open and communicative to our tenants, and stayed on top of all necessary repairs. I let them know all the things they should know to live in our house comfortably, especially anything that may become a safety issue. In turn, our tenants have done their best to take care of our property. We appreciate their paying on time and being proactive on any repair issue. In a difficult year, this relationship worked out quite well.

Our landlord, on the other hand, had been avoiding direct communication at the outset. If there is any repair issue, they would rather not be bothered... eventually, as one would expect, this kind of relationship ran into problems. We paid a generous above-market rent for them, in return we got almost no help from the owners who had lived here for a long time. Moreover, when it was time to renew the lease, they wanted to raise our rent, despite the softening market.

These problems pushed us towards buying. That aside, the economics appears to become more and more favorable for buying: home prices have been dropping steadily over the last year, mortgage rate has hit historical low and got lower. For a bigger house in the same neighborhood, our rent would more than cover the mortgage payment. With tax savings taken into account, we would be roughly ahead by the amount of principal payment we would pay against the house. That is, with a little bit of work as a homeowner, we would be building up equity every month. That equity would be totally gone to the landlord if we continue to rent.

In other words, if we buy the house we're renting now at market price, and rent it out as an investment property, we would be generating a small positive profit at year 1. Bear in mind this is one of the best neighborhoods in this area. Usually people tend to want to own, not rent. In such neighborhoods, it's usually hard to break even with rentals at the beginning. So this is a clear sign that it's about time to buy if one has a stable job. The housing may not have hit bottom yet, but it should be fairly close.

We found several houses we like. As we got into the market and started making offers, I quickly realized how thin the market was. You rarely see multiple offers. Very few buyers. At one point, our withdrawal on one house affected the pricing of some nearby properties immediately... Sellers have to price it right, or risk sitting on the market for months after months, and going through multiple reductions.

We didn't get the home purchase tax credit. Interstingly, the expiration of the tax credit have benefited us far more than $8000: The market had become markedly softer and the mortgage rate had gone down even more dramatically since June.

As I write this, we're getting ready to settle this week. After this local move, the turmoil of 2009 which had affected us in a big way will finally be behind us.      

Job creation as the leading indicator

Another Friday employment situation report, another disappointment.

Private-sector employers added just 71,000 jobs in July, according to a report released Friday by the Labor Department, fewer than the 100,000 plus jobs that economists were hoping for. Moreover, it also said private firms hired fewer workers in June than it had previously reported, as it revised that estimate down from 83,000 to 31,000 jobs.

The small increase in private-sector employment was more than offset by the loss of 143,000 temporary census jobs, and the nation's unemployment rate remained unchanged at 9.5 percent. Overall, the nation shed 131,00 jobs in July.

Remember when this measure, private job creation, fell off a cliff in May (reported early June) the stock market took a dive. Today's report also added pressure on the market which has been recovering quite well in July.

Recovery in housing market and consumer spending is now largely dependent on jobs. It's only logical that private job creation had become something of a leading indicator for the current economic recovery.

Corporate profit no longer seems to indicate job creation. And there aren't obvious leading sectors to point to that are creating many jobs.

Overall this year, private-sector payrolls have grown by 630,000 jobs, but about two-thirds of that increase occurred in March and April. After that, corporations have become more cautious in hiring.

Meanwhile, the strained state and local governments have shedded 48,000 jobs in July.

The sluggish job recovery is adding pressure to deflation.

Hedge Funds Not Knowing What to Do with Money?

May and June have been brutal for money managers. The volatility and conflicting economic signals made it very hard to stay the course or change the course. On hindsight, it would have been great to be 100% in cash since early May when S&P was at 1200. It's probably not a very good idea to raise cash after the 10% correction. But that appears to be what some of the big hedge funds have done, which has probably contributed to the market volatility and deepened the correction.

Barton Biggs, whose purchase of stocks in March 2009 gave Traxis Partners LLC a 38 percent gain last year (so?), said last week he sold about half his stock investments because of concern governments around the world are curtailing stimulus measures too soon.


“I’m not wildly bearish, but I don’t want to have a lot of risk at this point,” Biggs, who manages $1.4 billion, said in a telephone interview. “I’m not putting my money into anything. I’m raising cash.”


At the end of May, this same Big manager was voicing his opinion that the stock market was set to "pop" in days (yes, in no uncertain terms, "in a couple of days."). Apparently, he has been frustrated by June's continuing declines. But his earlier bullish call was a frustrating call at best. Did he actually know something or was he just wishing for something?

For more comments, see this Bloomberg article.

Nothing to Fear but Fear Itself?

There are a lot of talks about market psychology in recent days as the market went through a deep correction. For instance, the Wall Street Journal has a piece today that tries to argue that "[t]he biggest threat to recovery is the markets themselves." That is, the economic recovery would be back on track if the markets just believe it.

As if to confirm it, the market had a good rally today without any good news.

I do believe there is certain amount of truth in it, although I think there is far more than just investor psychology that's involved.

To a large degree, our modern economy is now very asset-based, in that consumers can spend based on the value of their assets such as homes and mutual funds. So if the markets for these assets are supported either by the Fed, or by optimistic views, we may see very positive effects on consumption and hence on recovery. That in turn may lead to higher asset values.

But that was how we got into the credit crisis, believing for example that home values would always go up. Consumers are now working hard to repair their balance sheets. In such an environment, we need actual income generation to support the economic recovery. That is, jobs.

This is probably why PIMCO's El-Erian thinks that unemployment has shifted from a lagging indicator to a leading one and is warning government policymakers to confront the structural problems in the economy. Eight millions of jobs have been lost since the beginning of the great recession. Despite historically low interest rate and trillions of dollars in stimulus spending, jobs are still scarce and are being added too slowly.

Investors have to ask, why these profitable corporations are not adding more jobs and who are going to lead job creation?

Rail and Retail

Rail traffic has been up over the past two months. Combined weekly traffic for new carloads and intermodal shipments is about 14% higher than a year ago, according to the Association for American Railroads.

U.S. retailers’ sales probably expanded at an average monthly rate of 4 percent in the first five months of the retail fiscal year that began Jan. 31, the biggest gain since 2006, the International Council of Shopping Centers trade group said in advance of its June report tomorrow. This maybe a sign that consumers are overcoming concern about unemployment and depressed home values. Just maybe.

Rail volumn and retail sales are not leading indicators. They're contemporaneous ones. While encouraging, they offer no assurance for the economic recovery.

2Q earnings season is underway. But even good earnings may not be enough to lift the depressed market sentiments. Stocks are cheap, if the outlook of good earnings continues to hold up and perhaps improve. The fear of a double-dip recession, however, has called that into question.

Additionally, the uncertainty around November's mid-term election and consequently the tax policy changes may not give market good enough reason to start its recovery from the recent lows.